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Industry Insights
January172020
U.S./China Phase One Trade Deal – Cautious Optimism, Greater Expectations

Ian Alberts, CPA

1.17.20 | Berdon Industry Insights

The long-brewing and highly anticipated trade deal with China finally took a first step forward with a limited trade agreement signed on January 15th1. While trade war tensions between the U.S. and China might have been eased somewhat, important questions remain unanswered and uncertainties prevail as to how the Phase One deal will be carried out.

What Was Accomplished

China

Under Phase One, some of the tariffs imposed on China will remain, while others will be cut or postponed. The levies that would have hit U.S. consumers hard, such as planned price hikes on mobile phones and computer monitors, have been postponed for now. In addition, the agreement includes a commitment from China to cease intellectual property theft, refrain from currency manipulation, cooperate in financial services, and increase purchases of U.S. products over the next two years. How this will be carried out remains a cause for concern.

On a going forward basis, China agreed to buy up to $200 billion in U.S. goods, including agricultural products such as soybeans, dairy products, and pork — offering some relief to U.S. farmers. Before the signing ceremony, National Economic Council director Larry Kudlow offered details on China’s purchase targets for each of the following sectors:

Agriculture$40-50 billion
Energy$50 billion
Financial Services$40 billion
Manufacturing$75 billion

United States

The U.S. agreed to reduce tariffs on some imported products manufactured in China, but will keep existing duties on $375 billion worth of merchandise. Following the Phase One signing, $250 billion of Chinese imports will still be subject to a 25% tariff, while $125 billion of Chinese goods will see a reduced tariff of 7.5%, down from 15%.

President Trump further stated that he would travel to China soon, as the two countries attempt to reach an extensive Phase Two agreement aimed at addressing such unresolved issues as complaints that China subsidizes its companies to give them an unfair advantage over foreign businesses. If the Phase Two agreement is signed, it is expected that tariffs on the $375 billion of Chinese goods will be lifted.

Enforcement and Dispute Resolution

If the U.S. or China fails to comply with the terms of the Phase One agreement, including any violations of intellectual property rights, such as forced technology transfer, there will be enforceable penalties. The agreement includes a dispute resolution process that allows either side to appeal if it believes that the other is not acting in accordance with the agreement.

Additionally, the agreement specifies that both China and the U.S. “shall ensure fair and equitable market access” for businesses that depend on the security of trade secrets. For example, specific measures were put in place to protect pharmaceutical companies’ intellectual property, trademarks, and patents.

Impact and Implications

While Phase One has had an immediate impact on the stock market, the long-term implications remain unclear. The Berdon Manufacturing, Distribution, and Retail Group will continue to monitor, analyze, and report on the impact of Phase One and further developments as Phase Two progresses.

Questions: Contact Ian Alberts at 516.806.3479 | ialberts@BerdonLLP.com or your Berdon advisor.

Berdon LLP New York Accountants

1 https://www.cbsnews.com/news/trump-signs-phase-one-trade-deal-with-china

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